Friedman's Inflation In The Late 19th Century

That deflation Friedman shows was seen as a benefit to many individuals in the late 19th Century. However, that period of deflation also produced individuals and political movements that tried to return that inflation (Friedman 1994). The main individuals behind that movement would be the farmers, silver producers, and the lovers of the greenbacks because it served their interests. Friedman contends that if the United States would have been on a bimetallic standard or a de facto silver standard then prices would not have fallen in the late 1800s and the United States would not have experienced the recessions of the 1890s because the money supply would have been stable and output would not have decreased (Friedman 1994). The next example …show more content…
The Democratic Party at the time promised the return of silver as part of the specie standard. The senators of the western U.S. states thought that increasing the money supply by purchasing silver would have pushed up prices and allow for the economy to recover (Friedman 1994). This was very much like the 1896 election and the Democratic arguments regarding the economy then. Congress passed a silver purchasing act that required the U.S. Treasury to purchase silver, until the market price was a $1.29 an ounce or silver equaled 1/3 of the monetary stock (Friedman 1994). One major outcome of this act was to provide a subsidy to silver producers at the expense of the taxpayers. The silver purchases did not do anything to aid the recovery of the American economy and in the late 1930s, President Roosevelt took the U.S. off the gold standard domestically (Friedman 1994). The last major outcome of this policy was that it rose the price of silver on the world market that China who was on a silver standard at the time could not pay for the remainder of its imports resulting in inflation. That inflation gave the communists an opening to attack the Nationalist government of the 1930s and coupled with the Japanese invasion led to China becoming a communist country in …show more content…
However, at the same time the wages and prices were frozen in order to fight inflation (Friedman 1994). Secondly, the government cut unnecessary spending in order the fiscal situation to absorb the blow to the monetary system (Friedman 1994). Israel managed to successfully peg its currency mainly because Israel devalued its currency before the peg came into effect, the U.S. dollar peaked and thus while the peg was in place it depreciated allowing Israeli exports to increase because those goods were cheaper compared to American goods (Friedman 1994). However, the peg in Israel did not last long and it ended up removing it in favor for a peg to a basket of currencies, not just one currency (Friedman 1994). Overall, Friedman contends that free floating exchanges are better than a peg because it prevents the minor issues turning into major crises and governments do not have the best information when determining a peg (Friedman 1994). However, he points out that central banks will always get involved to the determinant of the nation at a whole making free floating exchange rates politically infeasible (Friedman